The following are general recommendations when starting a small business or becoming self-employed:
Use a separate bank account (and optionally a business credit card). The stricter you are with separating business from personal transactions at the time of paying for something, the easier it makes record keeping and bookkeeping. Everything will be in one central place, and you don’t need to think back to separate business transactions from personal months afterwards.
Choose a business structure. Weigh the pros and cons of different options. Sole proprietorships are inexpensive options and generally have the same tax deductions available as other business types. LLCs allow flexibility to add additional owners or elect for different tax treatment down the road. An LLC can also offer limited legal liability in certain situations, though you should have appropriate insurance coverage for risks in your business. Annual fees for an LLC vary by state. Consider discussing the business structure with both a tax accountant and an attorney.
Tax payments – you are generally required to make estimated tax payments on your income. Generally, no one will withhold income tax from your business or self-employment income. The amount is an estimate. If you overpay the excess can be refunded. If you underpay, at least you reduced the amount owed. There are penalties for underpayment of estimated tax, so it’s generally safer to overpay than underpay. You don’t report to the IRS how much income you earned when making a payment. You simply make the payment for the amount you are ready to pay. For most business types (not c-corporations), your federal income tax payments should be made under your personal name and SSN.
Self-Employment Taxes – when you are a business owner or have self-employment income, your income is generally subject to self-employment taxes. Self-employment taxes are Social Security and Medicare taxes. For employees, your share of Social Security and Medicare taxes are withheld from your wages automatically and your employer pays the employer share of Social Security and Medicare taxes on top of your wages. When self-employed, you pay both the employer and employee share of Social Security and Medicare taxes. This is in addition to income taxes. The amount can be substantial and catch new business owners by surprise. Self-employment taxes are roughly 15% on the income (after expenses) from your business. Though there is a limit on income subject to Social Security tax ($168,600 for the 2024 tax year).
How to determine if something is a business expense: look at the purpose of the expense. Is it directly for business? For most business expenses, it’s clear whether it was a business expense (rent on an office space, paying wages to employees, website fees to advertise your business, etc.). If there is a significant personal component, it’s likely not a business expense or only a portion of the cost may be a business expense. Take meals as an example, were you meeting with someone for the primary purpose of networking for your business? That is likely a business expense. Or if the primary purpose is to satisfy hunger, that’s not a business expense, even if you have to eat to make it through the workday.
QuickBooks Online is the accounting system I recommend if you want to use software to track your business’ income and expenses. However, if you don’t expect much activity, you could get by with tracking transactions in a spreadsheet. I recommend the “Simple Start” QuickBooks Online subscription, which is their cheapest small business subscription (currently $35/month). If I start the subscription on my end, you’ll receive a 30% discount for 12 months. QuickBooks has a “Self-Employed” version and a “Small Business” version. I do NOT recommend the “Self-Employed” version as the features are extremely limited and it’s completely different from the “Small Business” plans that I have extensive familiarity with.
Payroll – payroll is only needed for paying wages to employees. Generally, business owners do not pay themselves via payroll (unless their business is taxed as an s-corporation or c-corporation). More than 95% of my clients that use a payroll service use Gusto.com for payroll. I’m happy to help with setting up Gusto’s payroll service.
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Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.